Seven billion years from now the Sun will enter its red giant phase and scorch the Earth. By then humanity may have colonised numerous galaxies. After all President Trump has declared that he will send a man to Mars during first term in office.
Academic cosmology is on the fence whether the universe itself will endure. Will it expand forever or begin to contract after critical expansion has occurred. Cosmologists just don’t know. So in the very long run, the fate of the stock market is unknown.
How about in the meantime? For the sake of convenience let’s assume all firms are listed, cash flow is equivalent to revenue and profit margins are constant.
Hence a firm’s a stock price depends on revenue growth. As revenue grows, earnings grow and increase the stock’s value.
The revenue of firms will continue to grow if the global economy continues to grow. Asking whether the stock market can continue to grow forever is tantamount to asking whether the global economy can continue to grow forever.
Economic growth depends on population growth, productivity growth and institutions
Global economic growth is determined by population growth, technological progress growth and institutions. Population growth increases the size of the labour force. Technological progress increases the productivity of the labour force. Institutions refer to the rules of the economic game, such as private property rights and the rule of law are necessary conditions for growth to take place in the first place.
Hence countries with higher population growth rates grow faster than countries with low population growth rates. This is the reason the US economy traditionally outpaces the EU. Less developed countries grow faster than developed countries because, they are able to import technologies already utilised by developed economies and hence become more efficient. Institutions explain why West-Germany prospered whilst East-Germany stagnated.
Global population growth has slowed. The population of richer economies will even decrease in the future whilst emerging economies exhibit strong, but slowing population growth. Hence global population growth will continue to support global economic growth albeit at a slower pace.
From an economic standpoint the golden age of benevolent institutions took place in the 90’s as the former Soviet Union and China embraced the global market place. The Great Financial Crisis of 2007 saw a surge of growth stifling regulation that has perhaps begun abating now. The regulatory trade-off of growth and stability is one driven by the economic cycle.
Technology is the engine of economic growth
Technology spurs economic growth by making workers more productive. Tractors trump pitchforks. Productivity also increases welfare, because its fruits are shared by the same number of people. Economic growth fueled by population growth by definition does not lead to per capita gains in welfare.
Unfortunately productivity growth has slowed almost monotonously in developed economies since the Second World War. The internet revolution lifted productivity growth rates significantly, but subsequently productivity growth has resumed its secular slowdown.
The productivity growth slowdown has fed the idea that technology is subject to diminishing returns. Human lifespans are limited, electricity more important than the internet, antibiotics and antivirals the final say in medicine and so forth. One can stretch physical and biological constraints only so far.
Historically prophets of technological doom have eaten humble pie. Most famously IBM’s president Thomas Watson said in 1943 that “I think there is a world market for about five computers.” Similar warnings were uttered concerning the automobile, telephone, television and electricity.
Our ability to foresee future inventions is evidently difficult. As with academic cosmology, the fate of technological progress is decidedly undecided. Happily, historically doomsayers have been outmatched by human ingenuity.
Consider this. According to UNESCO a billion people are still illiterate. Hence although technological progress might stop, its adoption in developing countries has a long way to go. This coupled with global population growth means that economic growth will continue for the foreseeable future. This is not difficult to foresee.
This article has been published in September 2017.